Credit gap for MSMEs
The COVID-19 pandemic and subsequent restrictions led to several disruptions across markets and supply chains in the sector. The MSME sector additionally suffered from a lack of cash flow and labor shortage, and many enterprises had to shut down businesses temporarily or completely. Many MSMEs are still largely underserved in terms of financing and lack access to formal channels of credit because they are considered high-risk borrowers. The reasons are lack of credit history, financial record keeping, and inability to provide collateral for accessing loans which means traditional lenders cannot offset the risk to their capital. The credit gap is further widened due to gender disparity. Women entrepreneurs who account for a minor share of the MSME sector face hindrances due to a lack of financing. As per World Bank reports, the funding rejection rate of women entrepreneurs in the country is double that of their male counterparts. However, various steps and initiatives from both the private and public sectors are being taken to fill this credit gap.The Reserve Bank of India revised and reviewed the scope of Priority Sector Lending (PSL) guidelines to benefit the credit-deficient areas of the economy including MSMEs. Alternative sources of capital such as fintech, digital NBFCs, P2P lending, and crowdfunding have emerged in recent years. Certain state-sponsored schemes focused on the formalization and financing of the MSME sector include Production-Linked Incentives under Make in India, Emergency Credit Line Guarantee Scheme (ECLGS), and Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) among others. The building of digital public infrastructure has also accelerated this process.